The world has changed dramatically, and the traditional way that legal services have been provided is not appropriate for today’s market. The business environment that clients operate in is markedly different from recent years, even months. We are well and truly living the ‘new normal’ and while law firms have adjusted, this is no time to sit back and relax ─ their evolution is, and must continue to be, ongoing.
As the legal landscape continues to transform the delivery of services, today’s in-house role has also evolved. Compliance, risk, fraud, data, security and competition, among many others, are all firmly now within their remit.
In Portugal, in-house teams used to deal in day-to-day legal matters and the main point of contact was the CEO or CFO. “This has changed completely, and, on top of providing legal services, their roles have evolved in a rather amazing way,” says Manuel Santos Vítor, Managing Partner of PLMJ. “They are now involved in every aspect of the business and the running of their company.”
All these changes, when taken individually, were to be expected – but coming together they cause a tsunami of challenges, says Moray McLaren, Senior Consultant at KermaPartners Iberia. “The whole modernisation of service delivery, with the dual challenge of commoditisation and the increasing costs of technology, talent and knowledge management, come at a time when clients are seeking to drive down costs.”
These very issues were discussed at Iberian Lawyer’s recent Iberian Legal Summit – part of its 40 under Forty Awards 2013. The debate included a specially selected group of General Counsel and law firm leaders from across the Iberian Peninsula. The Summit was held at the Museo del Traje and moderated by McLaren, KermaPartners Iberia and Olga García-González, Head of Legal Credit SGBM, Banco Santander.
Economic cycle or structural change
“In today’s legal market, while it is essentially business as usual, what we do see is that we have a great number of fishermen trying to fish in a much smaller pond,” says Emiliano Garayar, Managing Partner of Garayar Asociados. “Competition is stiff, both domestic and international, and the Iberian market is clearly overlawyered.”
And lawyers see many multinationals looking at Portugal and Spain as a combined ‘Iberian pond’. The countries are much more integrated from a business perspective than a legal one, and in-house counsel are generally centralised in Madrid. “So for external legal matters it is easier to reach out to a lawyer close by rather than outsourcing to multiple firms, lawyers and countries,” explains Santos Vítor at PLMJ, “something that is a challenge for the Portuguese legal market.”
Therefore, as Madrid is increasing becoming the regional legal hub, says McLaren at KermaPartners Iberia, it is no surprise that there will be a consolidation of law firms across the Barcelona – Madrid – Lisbon axis.
One big change that lawyers are seeing is that much more work is being done in-house by their clients than before. While the more commoditised and ‘rocket science’ work – complex litigation, M&A, etc – is still being outsourced, everything in-between is done in-house as much as possible.
“In-house counsel now understand better than ever what they see as ‘higher’ or ‘lower’ value legal services, and law firms are having to really catch-up,” explains McLaren at KermaPartners Iberia. “As one law firm was told during independent client research: ‘The firm is expensive for cheap work, but cheap for the expensive work’.
In parallel, with the switch from hourly rates to fixed fees, the pressure is now on firms to increase productivity and/or develop efficiencies. But some firms have significant overheads without the systems, management or unified culture required to bring the benefits of size. As a result, says McLaren, the market is maturing rapidly, with clients driving a much clearer segmentation and polarisation between the more expertise and commoditised-type firms. “The changes I remember in London over the past two decades have been felt in Spain and Portugal over the past five years”.
Clients are now externalising new kinds of work that are arising out of the crisis, and this has changed the way in which law firms need to react. “The way clients look at us has completely changed, and they really appreciate how we have accompanied them, during the good and the more recent bad days,” says Luis Fernando Guerra, Managing Partner of Deloitte Abogados. “We see how they need us to really collaborate with them, propose new solutions and that is the way we need to focusing on working both now and in the future.”
Money and work flows are now coming in on a worldwide rather than localised basis. “And global clients find global lawyers very valuable,” says García-González at Banco Santander.
International legal services have traditionally been provided on the basis of alliances, but this is no longer enough. “The loose alliances of the past are being replaced by more strategic and specialised ‘best friends’-type agreements, although in most cities there are currently not enough friends for everyone,” says McLaren. Consequently, he predicts more offices openings, mergers and consolidation.
What in-house counsel really need is their externals to go global and service the company abroad, to understand and get involved in their international operations and replicate the same agreements and services worldwide, keeping the uniformity of transactions while adapting them to any mandatory domestic laws and local trade practices, explains Inés Núñez de la Parte, Group General Counsel at Ingeteam. “We really need them to be project managers.”
Competition is tough, and differentiation is now about providing solutions, risk sharing, efficiency and proactivity. And, most importantly, communicating ‘value’ that clients understand and can present to their Management.
“If the service we receive from external lawyers isn’t complete and doesn’t cover all aspects, anticipating every issue involved, we cannot correctly fulfil our role internally,” explains Segimón at CBRE Global Investors. “We need them to understand that our job is dependent on how and when they react. It’s not that we are being tough in-house lawyers demanding issues be sorted overnight and fees be reduced to unsustainable or unrealistic levels – it’s that we have to provide our CEO with a legal solution or the alternatives available to make the best and most informed decision possible, so we really need complete, comprehensive and workable solutions.”
It all depends on the matter, however. If there is something urgent, they look at expertise as well as timing and reliability. “While I always ask for discounts, what is truly important is the expertise provided and getting a quick satisfactory result,” says Núñez de la Parte at Ingeteam, “and for this we will pay.”
In-house counsel suggest that law firms look at their internal budgets and base them on alternative fees rather than hourly rates to deliver true ‘added value’, agreeing that they would be much more inclined to work with a firm that understands and caters to this.
The risk of pricing
One of the main changes in-house counsel have noticed is fee negotiation. “It used to be much harder to negotiate a reduction, and capped fees were the exception rather than the rule,” says García-González at Banco Santander. “Now it is the other way around, and law firms have realised our needs have changed – they are more receptive to successes fees than before.”
In-house counsel have set budgets and have to justify them to their Management Boards, which is something that law firms have not been so sensitive to, explains Santos Vítor at PLMJ. “But we are learning that ultimately clients decide on fees not law firms.”
While the hourly rate may not be suitable for some of today’s legal services, there are still clients that choose it as they believe it provides a guarantee of quality for certain operations. “Clients are smart enough to understand that it is just another way of quoting,” says Eduardo Gracia, Managing Partner of Ashurst Madrid, “and we are becoming flexible enough to recognise when and where it can still be appropriate.”
María Segimón, General Counsel Spain & Portugal at CBRE Global Investors agrees that the hourly rate still works for certain situations, but more and more organisations are mostly working with capped fees. “When you put together a transaction, you need to have exact figures to budget it properly – it has been a painful process but I think we are getting there in developing a mutual understanding.”
Do something about it
Proactivity was a key point of focus, with in-house counsel looking for target-orientated approaches, and an upfront proactive lawyer. They want their lawyers to approach each project with fresh eyes as if it were the first time they see it rather than just applying past precedents, explains García-González at Banco Santander. “There are always nuances that will make a difference and clients want to feel that these are taken into account – every time.”
In-house counsel need lawyers with initiative who anticipate problems and create solutions ahead of time. If there are tax liabilities that may arise from a transaction, for example, in-house counsel want their externals to have their tax department ready to show the implications and alternative options available. “That is what I was missing and it is not something that lawyers were used to – traditionally they only worked on the aspects of the matter that they were specifically asked to consider,” explains Segimón at CBRE Global Investors. “But with small internal resources and transactions that have multiple legal aspects to consider, we now ask that our externals consider themselves as part of the team and take responsibility for the transaction as a whole. And I must confess that once we tell them how we expect them to work for us, the reaction is very positive.”
Partner involvement was another focal point. Clients want their matters to be dealt with at senior level, not using juniors just so they can lower fees. “If there is less senior level involvement in-house counsel will find out about it – they will see through it,” says Santos Vítor at PLMJ. “This is a warning to what we have seen happening in other law firms that fight on price and deliver the work through junior lawyers to keep profitability – clients notice and react to that.”
In-house counsel also react to a post-transaction conversation – especially if the law firms are proactive in asking for feedback. “After complex deals have closed, the lack of time doesn’t always make it easy, but I try to implement a ‘post-mortem’ meeting with the external lawyers that advised the transaction,” says García-González at Banco Santander. “It serves to share views on how the deal went, things that went well and things that could be improved for next time.”
Vision for the future
While some say that the ‘good days are back’ and are talking double digit growth – others feel that the Iberian Market is being a little too optimistic too early. “I am sceptical about these figures,” says Guerra at Deloitte Abogados. “If we forget where are and what we have been through over the past four years we may repeat previous mistakes – if we relax, that’s when we will be lost.”
But if you are a good lawyer, you will always have opportunities and visibility in the market, adds Gracia at Ashurst. “But these days only those who are remarkable in providing services have the opportunity to succeed.”
Law firms need to be reinventing themselves every day, anticipating both the competition as well as the ever-changing needs of their clients. As the market segments and consolidates, they need to be clear on their priorities. “While some are playing the game of size, I prefer to play the game of profitability,” says Guerra at Deloitte Abogados, “by choosing the right people and providing the right services at a price that reflects the quality.”
The ability to change is key – what law firms did yesterday is not going to be what they do tomorrow. They must therefore seriously listen what it is their clients now need and adapt their service offerings to keep up with the ongoing evolution of today’s legal market.